Futures Push Higher Ahead Of Data Deluge, Yellen Capital Statement

This week's US data onslaught begins today, with the ADP private payroll report first on deck (Exp. 230K, down from 281K), followed by the number of the day, Q2 GDP, which after Q1's abysmal -2.9%, is expected to increase 3%. Anything less and in the first half the US economy will have contracted, something the purists could claim is equivalent to a recession. The whisper numbers are to the downside since consumption and trade never caught up and the only variable is inventory as well as Obamacare, whose original $40 billion "contribution" in Q1 was entirely eliminated and converted into a deduction, something we expect will be reversed into Q2.

Following the backward looking GDP (which will be ignored by the sellside penguins if it is bad and praised if good) at 2:00 pm Yellen Capital LLC comes out with a correction on her call to short social networking stocks, as well as admit once again that the "data-driven" Fed really has no idea what it is doing and how it will tighten, but that tightening is imminent and another $10 billion taper to QE will take place ahead of a full phase out in October. Joking aside, the Fed is expected not to do much if anything, which may be just the right time for Yellen to inject an aggressively hawkish note considering her inflation "noise" refuses to go away.

In terms of market action so far, here is the latest:

S&P 500 futures up 0.2% to 1966.3

Stoxx 600 down 0.2% to 341.7

US 10Yr yield up 1bps to 2.47%

German 10Yr yield down 0bps to 1.12%

MSCI Asia Pacific up 0.3% to 149.9

Gold spot down 0% to $1298.8/oz

The reason for the US equity future rise is the latest round of USDJPY levitation, which has also pushed the Nikkei higher, which was to be "expected" following the worst industrial production print in post-Abenomics Japan since the 2011 Fukushima disaster.

Stocks traded mixed in Europe this morning, as market participants positioned for key risk events due later today. As a result, the more defensive sectors such as health care outperformed, with Bayer (+2.58%) leading the move higher following earnings. Peripheral EU indices outperformed, the Spanish IBEX-35 index trading higher since the get-go following earnings by BBVA (+1.13%).

In European bond markets, we should also highlight that there were fresh all time multi-century lows in yields for several European sovereigns yesterday including Spain (2.47%), Holland (1.31%), Germany (1.12%) and France (1.51%). Bund yields are now below the previous trough of July 2012, when we were in the midst of the Eurozone debt crisis. Recent economic data has been a factor in driving lower yields (e.g. German IFO), together with recent coupon/principal repayments, but the evidence continues to suggest that demand for carry and fixed income remains high amongst investors.

Turning to Asia, a less defensive tone has prevailed overnight led by the HSCEI (+0.4%) and KOSPI (+1.1%). The Nikkei is somewhat lagging (+0.1%) after mixed corporate earnings reports but S&P500 futures are just in positive territory (+0.1%). USDJPY is rising following disappointing Japanese industrial production data for June. IP fell a seasonally-adjusted 3.3% MoM in June, below consensus of -1.2%. Shipments fell 1.9% and have now fallen for five straight months. According to DB’s Japanese economist, the weakness in production reflects not only the negative payback following the VAT-induced front-loading of demand, but also stagnant exports. In China, following Premier Li’s dovish comments earlier this week, the Chinese President has repeated that the economy faces headwinds and that the government should focus on targeted measures to manage those downside risks.

Last but certainly not least, Argentina has until today to settle with holdout creditors or face a default on restructured debt. The WSJ writes that Argentina, however, could continue to claim that it isn’t in default. Argentine officials contend they have met their obligations by transferring money to the trustee for an interest payment that was due June 30 on some of the bonds it issued in past restructurings. Due to the 2012 ruling, the bank cannot disburse the money to investors without risking being held in contempt of court (WSJ). The debt payment is due at midnight US ET today.

Bulletin headline summary from RanSquawk and Bloomberg

The cautious sentiment ahead of the key risk events such as the US GDP report and FOMC meant that health care stocks outperformed on the sector breakdown in Europe.

Bunds and Gilts failed to benefit from month-end related flow, as expectations of another taper to Fed’s QE program saw bond yields climb.

FOMC expected to taper their QE program by another USD 10bln today, with US GDP also due – expected to rebound to +3.0%, in terms of earnings focus will be on Metlife, Phillips 66, Southern Co and Sprint.

Treasuries decline before FOMC announces rates/QE decision; most expect additional $10b taper, possibility of first fed funds hike sooner than many expect; first look at July jobs comes with ADP at 8:30am, est. 230k.

Russia’s central bank said it’s ready to help any of the financial institutions targeted by the U.S. and Europe in the latest round of sanctions, as international investigators reportedly abandoned the latest attempt to visit the crash site of Malaysian Air Flight 17

Netanyahu told Israel to prepare for an extended effort to “neutralize” the tunnels that have penetrated Israel from Gaza and that Hamas must be disarmed under any truce

Japanese industrial output fell the most since the March 2011 earthquake, highlighting the widening impact to the economy of April’s sales-tax increase

The non-profit groups that employed two American citizens who contracted Ebola in Africa have closed a Liberia treatment center over civil disturbances, and plan to evacuate 60 people because of the disease risk

Chinese President Xi Jinping’s biggest political maneuver since he took the nation’s helm -- a corruption probe of former state security chief Zhou Yongkang -- both increased his authority within the Communist Party and escalated the risks of its legitimacy

Bunds failed to benefit from somewhat lacklustre performance by EU stocks this morning, as expectations of yet another Fed QE taper, together with profit taking related flow having touched on contract highs yesterday weighed on prices. So much so that month-end and coupon/redemption related flow took a back seat. Somewhat mixed German states CPI data failed to have a meaningful impact on the price action of various asset classes, although German 5y B/E rates fell to lowest level since June 2012.

Stocks traded mixed in Europe this morning, as market participants positioned for key risk events due later today. As a result, the more defensive sectors such as health care outperformed, with Bayer (+2.58%) leading the move higher following earnings. Peripheral EU indices outperformed, the Spanish IBEX-35 index trading higher since the get-go following earnings by BBVA (+1.13%). The sentiment towards financials was also supported by earnings by Barclays (3.99%), which outperformed in the FTSE-100 index following earnings pre-marke

FX

EUR/USD and GBP/USD traded lower, as short-end rate differential flows supported the USD index ahead of the FOMC decision later on today. At the same time, favourable interest rate differential flows meant that USD/JPY was able to continue to consolidate above the key 200DMA line.

COMMODITIES

Gold has traded sideways since the European open after a lacklustre performance overnight, remaining below the USD 1300 level as markets await the FOMC rate decision, and a slew of US data in the form of GDP and ADP. After the large drawdown for US API inventories yesterday the energy complex had seen some early upside momentum, however with little further news flow for WTI or Brent crude prices have since retraced. The markets now look ahead to the DoE inventories later today, with the headline number expected to show a drawdown of 1250K (Prev. drawdown 3969K).

Finally, here is DB's Jim Reid with his take on overnight events and today's key highlights

GDP is backward looking so it’s not usually the most important data release but it will surely be a fairly poor indictment of the US economy if today's Q2 print doesn't have at least a 3-handle (expectations 3.0%, DB at 4.2%). Notwithstanding any revisions to Q1's -2.9% print, we need a 3+% print to ensure any growth at all in H1. The early year bad weather did clearly have an impact but a healthier economy would surely have taken it more in its stride over a 6 month period. However on the plus side employment has been decent all year and the ADP report out today (+230k expected, DB at +250k) is likely to be seen as more important than GDP barring a big move or revision in the latter. Our take on the US economy continues to be that it’s growing but that the trend rate of growth is currently structurally impaired and that the disappointments relative to expectations that have characterised this recovery will broadly continue. Clearly today's number might show a better story but it wouldn't change our view about the structural impairments. We should say though that we think the US has one of the best potential growth rates in DM so our comments are not anti-US they are a reflection of structural growth problems in most of these countries. Having said all this, today is the day when you can be made a fool of as we see the annual US GDP revisions which see history rewritten over the past 3 years. So watch out for these.

Also today we have the conclusion of the FOMC but this is likely to be the tamest statement of the year. There is no planned press conference so markets will be left interpreting any tweaks to the FOMC’s policy statement. DB’s Peter Hooper thinks neither the overall economic activity picture nor the inflation data have been firm enough recently to move the Committee to signal that they are moving closer to lift-off on rates. Similarly, the WSJ’s Fed watcher Hilsenrath thinks that tame inflation expectations are the trump card for the doves on the Committee. He notes that households surveyed by the University of Michigan see inflation of 3.1% in the year ahead. That’s above the Fed’s official 2% objective, but in line with where they’ve seen inflation over the past decade.

Ahead of today’s busy calendar, there are plenty of questions about the recent price action in bond markets and what it is trying to tell us. In the US, the main theme is the continued flattening of the treasury curve. The spread between the US 5yr and the 30yr bond finished Tuesday at 152bp, which is the narrowest it’s been since January 20th 2009. Meanwhile the 2s/10s curve (192bp) reached its flattest level since June 2013. We mentioned earlier this week that it seems that the low-for-longer view camp, which we're already members, has gained more followers recently. To be fair, some of the flattening has been caused by the front end of the treasury curve which has tracked higher in yield this year, though this has been met with a significant move lower in longer bonds. Part of this can be attributed to the renewed interest in the theme that the US economy faces a lower terminal cash rate, whether it is due to productivity constraints or other structural constraints. Our rates strategists also think that foreign official investors still have cash to put to work in Treasuries after a period of underinvestment, and they continue to think that real money investors are short duration in the longer end as a hedge to overweight positions in spread product. So perhaps there is more demand at the long end to come if this positioning reverses.

In European bond markets, we should also highlight that there were fresh all time multi-century lows in yields for several European sovereigns yesterday including Spain (2.47%), Holland (1.31%), Germany (1.12%) and France (1.51%). Bund yields are now below the previous trough of July 2012, when we were in the midst of the Eurozone debt crisis. Recent economic data has been a factor in driving lower yields (e.g. German IFO), together with recent coupon/principal repayments, but the evidence continues to suggest that demand for carry and fixed income remains high amongst investors. Indeed, yesterday’s US$35bn 5yr UST auction saw direct bidders take up their largest share at a 5yr auction since December 2012 according to Reuters. Dealers were left with just 26% of the issue. Yesterday’s CaseShiller home price data (-0.3% vs +0.3% expected) helped support USTs, but this was partially unwound following the better than expected US consumer confidence data (90.9 vs 85.4 expected).

It was a different story for Russia’s finance ministry who cancelled its weekly domestic treasury auction for the second week in a row yesterday, calling market conditions “unfavourable”. No doubt the threat of sanctions have a part to play, but it was interesting to see the Ruble rally after yesterday's sanction headlines suggesting that there was relief that broader, more disruptive phase 3 sanctions had been avoided for the time being. The Ruble rallied about 0.6% from the lows against the USD, and closed only .0.15% lower on the day. EU governments have reportedly reached a preliminary deal to bar Russian state-owned banks from selling new shares or bonds in Europe and restrict the export of equipment to modernize the oil industry. New contracts to sell arms to Russia and the export of machinery, electronics and other civilian products with potential military uses will also be banned (Bloomberg). Already under pressure by that stage, the S&P500 (-0.45% on the day) took another leg lower following an announcement from the White House that it will add three Russian banks (VTB, Bank of Moscow and the Russian Agricultural Bank) and United Shipbuilding Corp (shipbuilder for Russian Navy) to its list of sanctioned entities (restricting their ability to raise long term financing in USD, amongst other restrictions). In reaction to the increased sanctions, a group of Russian lawmakers have proposed banning the “Big Four” global accounting firms and two of the world’s largest consulting groups from the country (FT). The article says that a sudden ban on foreign providers of such services would seriously disrupt a large number of the country’s companies which use offshore holding structures governed by English law.

Turning to Asia, a less defensive tone has prevailed overnight led by the HSCEI (+0.4%) and KOSPI (+1.1%). The Nikkei is somewhat lagging (+0.1%) after mixed corporate earnings reports but S&P500 futures are just in positive territory (+0.1%). USDJPY is rising following disappointing Japanese industrial production data for June. IP fell a seasonally-adjusted 3.3% MoM in June, below consensus of -1.2%. Shipments fell 1.9% and have now fallen for five straight months. According to DB’s Japanese economist, the weakness in production reflects not only the negative payback following the VAT-induced front-loading of demand, but also stagnant exports. In China, following Premier Li’s dovish comments earlier this week, the Chinese President has repeated that the economy faces headwinds and that the government should focus on targeted measures to manage those downside risks.

There’s plenty of data, headlines and meetings to keep us on our toes today. As we go to print, Barclays, Bayer AG & Banco Popular Espanol are due to report earnings before European markets open. Spain reports preliminary Q2 GDP while Spanish and German CPI will be closely watched ahead of Thursday’s Euroarea inflation number. The US data docket starts with ADP employment today at 1:15pm London time, followed by GDP and PCE at 1:30pm. The FOMC’s statement is due at 7pm.

Last but certainly not least, Argentina has until today to settle with holdout creditors or face a default on restructured debt. The WSJ writes that Argentina, however, could continue to claim that it isn’t in default. Argentine officials contend they have met their obligations by transferring money to the trustee for an interest payment that was due June 30 on some of the bonds it issued in past restructurings. Due to the 2012 ruling, the bank cannot disburse the money to investors without risking being held in contempt of court (WSJ). The debt payment is due at midnight US ET today.

and it's so much more fun to shoot with a pellet pistol to butterflies than to birds because it's a bit more harder to hit them... and than I don't have to chase my dog in the house because he bring those dead birds in the house and all...

Before we accept the Q1 GDP of -2.9% as gospel, we may want to examine our inflation assumptions:

Stock market participants might be in for a second quarter surprise. The result of many years of changes made to the official inflation measures is a substantially understated inflation rate. John Williams (www.shadowstats.com) provides inflation estimates based on previous official methodology when the Consumer Price Index still represented the cost of a constant standard of living. The 1.26% inflation measure used to deflate first quarter nominal GDP is unrealistic, as Americans who make purchases are aware.

A reasonable correction to the understated deflator gives a much higher first quarter contraction. The two main causes of inflation’s understatement are the substitution principle introduced during the Clinton regime and the hedonic adjustments ongoing since the 1980s that redefine price rises as quality improvements. Correcting for excessive hedonic adjustments gives a first quarter real GDP contraction of 5%. Correcting for hedonic and substitution adjustments gives a first quarter real GDP contraction of 8.5%.

sanctions blew me out of the market due to deep water rigs, siberian projects and major multinational oil cos. ussa majors should invert asap.. the state dept dildo riders and horseface + obumbler (president valerie jarrett) are incapable of negotiations and don't realize sanctions might work until fall and maybe less than that if the germ economy starts to tank... putin has them by the thermostat... there is no ussa economy except obamacare and ebt.... the govt numbers are bullshit. it makes me uneasy to hear dempsey referring to a warplan that is 20 years old, especially since we don't have the same armored deployment we did 20 years ago... this entire administration is run by ass kissing incompetent idiots... and since when do generals make public comments about plans when "negotiations" are supposedly taking place... of course now we get a view of how obumbler negotiates... by yelling at allies and bowing to enemies... limp wristed bathhouse boy... pathetic

In the US, the main theme is the continued flattening of the treasury curve. The spread between the US 5yr and the 30yr bond finished Tuesday at 152bp, which is the narrowest it’s been since January 20th 2009. Meanwhile the 2s/10s curve (192bp) reached its flattest level since June 2013. We mentioned earlier this week that it seems that the low-for-longer view camp, which we're already members, has gained more followers recently...

"The non-profit groups that employed two American citizens who contracted Ebola in Africa have closed a Liberia treatment center over civil disturbances, and plan to evacuate 60 people because of the disease risk"

Now that we’ve seen the Fed is the world’s largest hedge fund with the added capability to print whatever money it needs to buy whatever it wants, (which is kind of like sitting at a blackjack table and being allowed to double down endlessly until you’re dealt a winning hand), my question is this:

How come the TBTF banks are the only ones allowed to buy shares in this biggest of all TBTF banks? Shouldn’t all investors be allowed to get in on the racket?